AUDIT OF INVENTORIES

Problem No. 1

Presented below is a list of items that may or may not reported as inventory in a company’s December 31 balance sheet.

1. Goods out on consignment at another company’s store P1,200,000

2. Goods sold on installment basis 150,000
3. Goods purchased f.o.b. shipping point that are in transit at December 31 180,000
4. Goods purchased f.o.b. destination that are in transit at December 31 300,000
5. Goods sold to another company, for which our company has signed an agreement to
repurchase at a set price that covers all costs related to the inventory 450,000
6. Goods sold where large returns are predictable 420,000
7. Goods sold f.o.b. shipping point that are in transit December 31 180,000
8. Freight charges on goods purchased 120,000
9. Factory labor costs incurred on goods still unsold 75,000
10. Interest cost incurred for inventories that are routinely manufactured 60,000
11. Costs incurred to advertise goods held for resale 30,000
12. Materials on hand not yet placed into production 525,000
13. Office supplies 15,000
14. Raw materials on which a the company has started production, but which are not completely
processed 420,000
15. Factory supplies 30,000
16. Goods held on consignment from another company 675,000
17. Costs identified with units completed but not yet sold 390,000
18. Goods sold f.o.b. destination that are in transit at December 31 60,000
19. Temporary investment in stocks and bonds that will be resold in the near future 750,000

1. How much of these items would typically be reported as inventory in the financial statements?
a. P3,450,000 c. P3,390,000
b. P3,000,000 d. P3,330,000

2. In auditing inventories, a major objective relates to the existence assertion. Of the following audit procedures relating
to inventories, which does not support the existence assertion?
a. The auditor reviews the client's inventory-taking instructions for such matters as proper arrangement of goods,
separation of consigned goods, and limits on movements of goods during inventory.
b. The auditor observes the client's inventory and performs test counts as appropriate.
c. The auditor confirms inventories not on the premises.
d. The auditor performs a lower of cost or market test for major categories of inventory.

3. When auditing merchandise inventory at year end, the auditor performs a purchase cutoff test to obtain evidence
that
a. No goods held on consignment for customers are included in the inventory balance.
b. No goods observed during the physical count are pledged or sold.
c. All goods owned at year end are included in the inventory balance
d. All goods purchased before year end are received before the physical inventory count.

Problem No. 2

The following accounts were included in the unadjusted trial balance of Veritas Company as of December 31, 2020:

Cash P 481,600
Accounts receivable 1,127,000
Inventory 3,025,000
Accounts payable 2,100,500
Accrued expenses 215,500

During your audit, you noted that Veritas held its cash books open after year-end. In addition, your audit revealed the
following:

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1. Receipts for January 2021 of P327,300 were recorded in the December 2020 cash receipts book. The receipts of
P180,050 represent cash sales and P147,250 represent collections from customers, net of 5% cash discounts.

2. Accounts payable of P186,200 was paid in January 2021. The payments, on which discounts of P6,200 were taken,
were included in the December 2020 check register.

3. Merchandise inventory is valued at P3,025,000 prior to any adjustments. The following information has been found
relating to certain inventory transactions.

a. Goods valued at P137,500 are on consignment with a customer. These goods are not included in the inventory
figure.

b. Goods costing P108,750 were received from a vendor on January 4, 2021. The related invoice was received and
recorded on January 6, 2021. The goods were shipped on December 31, 2020, terms FOB shipping point.

c. Goods costing P318,750 were shipped on December 31, 2020, and were delivered to the customer on January 3,
2021. The terms of the invoice were FOB shipping point. The goods were included in the 2020 ending inventory
even though the sale was recorded in 2020.

d. A P91,000 shipment of goods to a customer on December 30, terms FOB destination are not included in the year-
end inventory. The goods cost P65,000 and were delivered to the customer on January 3, 2021. The sale was
properly recorded in 2021.

e. The invoice for goods costing P87,500 was received and recorded as a purchase on December 31, 2020. The
related goods, shipped FOB destination were received on January 4, 2021, and thus were not included in the
physical inventory.

f. Goods valued at P306,400 are on consignment from a vendor. These goods are not included in the physical
inventory.

Based on the above and the result of your audit, determine the adjusted balances of the following as of December 31,
2020:

1. Cash
a. P481,600 c. P334,300
b. P340,500 d. P346,700

2. Accounts receivable
a. P1,454,300 c. P1,127,000
b. P1,282,000 d. P1,274,250

3. Inventory
a. P3,017,500 c. P2,930,000
b. P3,040,000 d. P2,505,000

4. Accounts payable
a. P2,395,450 c. P2,286,500
b. P2,307,950 d. P2,301,750

5. Current ratio
a. P2.00 c. P1.84
b. P1.83 d. P2.01

Problem No. 3

The Trading Company values its inventory at the lower of FIFO cost or net realizable value (NRV). The inventory accounts
at December 31, 2019, had the following balances.

Raw materials P 650,000

Work in process 1,200,000
Finished goods 1,640,000

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The following are some of the transactions that affected the inventory of the Trading Company during 2020.

Jan. 8 Trading Company purchased raw materials with a list price of P200,000 and was given a trade
discount of 20% and 10%; terms 2/15, n/30. Trading Company values inventory at the net invoice
price
Feb. 14 Trading Company repossessed an inventory item from a customer who was overdue in making
payment. The unpaid balance on the sale is P15,200. The repossessed merchandise is to be
refinished and placed on sale. It is expected that the item can be sold for P24,000 after estimated
refinishing costs of P6,800. The normal profit for this item is considered to be P3,200.
Mar. 1 Refinishing costs of P6,400 were incurred on the repossessed item.
Apr. 3 The repossessed item was resold for P24,000 on account, 20% down.
Aug. 30 A sale on account was made of finished goods that have a list price of P59,200 and a cost P38,400.
A reduction of P8,000 off the list price was granted as a trade-in allowance. The trade-in item is to
be priced to sell at P6,400 as is. The normal profit on this type of inventory is 25% of the sales price.

Based on the above and the result of your audit, answer the following: (Assume the client is using perpetual inventory
system)

1. The entry on Jan. 8 will include a debit to Raw Materials Inventory of

a. P200,000 c. P141,120
b. P144,000 d. P196,000

2. The repossessed inventory on Feb. 14 is most likely to be valued at

a. P14,000 c. P17,200
b. P24,000 d. P14,400

3. The journal entries on April 3 will include a

a. Debit to Cash of P24,000.
b. Debit to Cost of Repossessed Goods Sold of P14,000.
c. Credit to Profit on Sale of Repossessed Inventory of P3,600.
d. Credit to Repossessed Inventory of P20,400.

4. The trade-in inventory on Aug. 30 is most likely to be valued at

a. P8,000 c. P6,000
b. P4,800 d. P6,400

5. How much will be recorded as Sales on Aug. 30?

a. P51,200 c. P57,200
b. P56,000 d. P57,600

Problem No. 4

During your audit of the records of the Good Corporation for the year ended December 31, 2020, the following facts were
disclosed:

Raw materials inventory, 1/1/2020 P 720,200

Raw materials purchases 5,232,800
Direct labor 4,900,000
Manufacturing overhead applied (150% of direct labor) 7,350,000
Finished goods inventory, 1/1/2020 1,240,000
Selling expenses 8,112,800
Administrative expenses 7,377,200

Your examination disclosed the following additional information:

a) Purchases of raw materials

Month Units Unit Price Amount

January – February 55,000 P17.76 P 976,800

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 March – April 45,000 20.00 900,000
May – June 25,000 19.60 490,000
July – August 35,000 20.00 700,000
September – October 45,000 20.40 918,000
November – December 60,000 20.80 1,248,000
265,000 P5,232,800

b) Data with respect to quantities are as follows:

Units
Explanation 1/1/20 12/31/20
Raw materials 35,000 ?
Work in process (80% completed) - 25,000
Finished goods 15,000 40,000
Sales, 200,000 units

c) Raw materials are issued at the beginning of the manufacturing process. During the year, no returns, spoilage, or
wastage occurred. Each unit of finished goods contains one unit of raw materials.

d) Inventories are stated at cost as follows:

• Raw materials – according to the FIFO method
• Direct labor – at an average rate determined by correlating total direct labor cost with effective production during
the period
• Manufacturing overhead – at an applied rate of 150% of direct labor cost

Based on the above and the result of your audit, answer the following:

1. The raw materials inventory as of December 31, 2020 is

a. P992,000 c. P 936,000
b. P888,000 d. P1,040,000

2. The work in process inventory as of December 31, 2020 is

a. P1,496,000 c. P1,746,000
b. P1,514,000 d. P1,776,000

3. The finished goods inventory as of December 31, 2020 is

a. P2,793,600 c. P3,553,130
b. P3,334,000 d. P2,812,000

4. The cost of goods sold for the year ended December 31, 2020 is
a. P16,897,000 c. P14,077,000
b. P14,161,400 d. P13,911,400

Problem No. 5

The Merilon Merchandising Company is a leading distributor of kitchen wares. The company uses the first-in, first-out
method of calculating the cost of goods sold. The following information concerning two of the company’s products is
taken from the month of May:

PANS KETTLES
No. of Unit No. of Unit
units cost units cost
May 1, beginning inventory 10,000 P 60 6,000 P 40

Purchases:
May 15 14,000 65 9,000 P 42
May 25 6,000 75

Sales for the month 20,000 10,000

(@ P80) (@ P44)

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On May 31, Merilon’s suppliers reduced their price from the last purchase price by the following percentages:

Pans…………………..25% Kettles…………………20%

Accordingly, the company agreed to reduce selling prices by 15% on all items beginning June 1.

Merilon Merchandising Company’s selling costs are calculated at 10% of selling price. Both products have a normal profit
of 30% on sales prices (after selling costs).

Based on the above and the result of your audit, answer the following:

1. Total cost of Pans as of May 31 is

a. P710,000 c. P600,000
b. P653,300 d. P612,000

2. Total cost of Kettles as of May 31 is

a. P210,000 c. P200,000
b. P206,000 d. P168,300

3. The inventory at May 31 should be valued at

a. P768,300 c. P920,000
b. P780,300 d. P890,000

4. The loss on inventory write down for the month of May is

a. P139,700 c. P29,300
b. P137,300 d. P27,600

5. The cost of sales, before loss on inventory write down, for the month of May is
a. P1,778,000 c. P1,797,700
b. P1,685,600 d. P1,658,000

Problem No. 6

Armildez Company began operations in 2015. On July 15, 2020, a fire broke out in the company’s warehouse destroying
all inventory and many accounting records. The following information was assembled from the microfilmed records. All
sales and purchases are on account.

January 16, 2020 July 15, 2020

Inventory P287,700 P?
Accounts receivable 261,180 257,780
Accounts payable 176,280 245,700
Collections from customers, 1/1/2020 – 7/15/2020 1,507,600
Payments to suppliers, 1/1/2020 – 7/15/2020 975,000
Goods out on consignment on July 15, 2020, at cost 97,500
Goods in transit at July 15, 2020, purchased FOB Shipping Point
(included in the July 15, 2020 accounts payable balance) 34,750

The following is a summary of prior year’s sales and gross profit on sales:

2017 2018 2019

Sales P1,252,000 P1,410,000 P1,360,000
Gross profit 375,600 366,600 462,400

1. What is the entity’s average gross profit ratio based on its prior year’s sales?
a. 26% c. 30%
b. 34% d. 29%

2. What is the Company’s total sales for the period January 1 to July 15, 2020?
a. P1,504,200 c. P1,765,380
b. P1,511,000 d. P1,768,780

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3. What is the Company’s total purchases for the period January 1 to July 15, 2020?
a. P905,580 c. P1,044,420
b. P912,170 d. P1,009,670

4. What is the Company’s estimated inventory on July 15, 2020 before the fire?
a. P186,605 c. P146,930
b. P244,430 d. P279,180

5. What is the inventory fire loss?

a. P146,930 c. P132,250
b. P186,605 d. P112,180

End of Material

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